Senate Dems drop estate tax plan

Senate Democratic leaders are eliminating a provision to tax wealthy estates in order to shore up support within their ranks for President Barack Obama’s election-year tax plan, senators and aides said Thursday.

Since there was no consensus in the Senate Democratic Caucus over the levels to tax estates transferred after a person’s death, Senate Majority Leader Harry Reid told senators Thursday he’d drop that provision. The move could limit defections in his caucus and put the focus on this season’s central campaign fight: Whether to extend Bush-era tax rates at 35 percent for the top 2 percent of earners or let them increase to the 39.6 percent level.

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The bill would now cost $250 billion, down from the $272 billion, one-year cost of the original proposal, aides said.

While the Obama tax bill has no chance of winning the 60 votes needed for passage, Democrats want to muster at least a simple majority of senators so they can blame Republicans for protecting wealthy families at the expense of a tax break for 98 percent of Americans. Anything less than 50 votes would muddy the president’s argument.

Obama wants to let Bush-era tax rates expire for households with income over $250,000, and extend the rest of the rates for one year. Republicans want to extend all of the Bush-era tax rates for one year, warning that any tax increase would erode a tepid economic recovery.

A vote is expected next week on the Democratic plan, and Reid’s team is confident Democrats will muster at least 50 votes, especially after dropping the estate tax provision. Sens. Jim Webb (D-Va.) and Joe Lieberman (I-Conn.) both have announced they would oppose the Obama plan.

The original version of the Senate Democrats’ tax legislation included a provision that set the maximum estate tax rate at 45 percent for estates valued at more than $3.5 million. Right now, there’s a 35 percent rate for estates worth more than $5.12 million. But if Congress doesn’t act, estates worth $1 million could be hit with a 55 percent tax rate next year. Republicans lampoon the estate tax, calling it the “death tax.”

To strengthen their arguments for extending all the current rates, Senate Republicans on Thursday circulated a study by the nonpartisan Joint Committee on Taxation that showed there was a mere $28 billion difference between the GOP proposal and the Democratic plan, which would end the current rates for household income of above $250,000. That difference, Republicans noted, equaled how much the government spends in a mere three days.

“The American people deserve better than to have the president and his allies threaten to melt down our economy for what amounts to less than three days of federal spending,” said Utah Sen. Orrin Hatch, the top Republican on the Finance Committee.

Sen. Chuck Schumer (D-N.Y.) dismissed the report as a “smokescreen” by Republicans.

“The truth is, if we decouple the tax cuts for those earning above $250,000, that means they will be gone for good,” Schumer said in a statement. “Over 10 years, that will reduce the deficit by $800 billion compared to what Republicans want to do.”